Why a court's Puerto Rico decision could cost issuers billions

WASHINGTON – Municipal Analysts are asking a federal appellate court to overturn a district court decision on Puerto Rico that they feel could cause “significant disruption” to the municipal marketplace by undermining investor confidence in revenue bond pledges and cost issuers billions of dollars.

The National Federation of Municipal Analysts filed its friend-of-the-court brief Wednesday, telling the Court of Appeals for the First Circuit in Boston that it should overturn a January 2018 decision of the U.S. District Court for the District of Puerto Rico that allowed revenues backing Puerto Rico Highway and Transportation Authority (HTA) bonds to be diverted for other uses during the debt restructuring process. That treatment of the revenue bonds flies in the face of the way investors thought revenue bonds were treated in bankruptcy proceedings and has grave implications, the NFMA said.

“We have filed this brief because the district court’s decision, if upheld, would undermine protections expected by municipal bond investors, and would also likely result in higher borrowing costs for issuers going forward at a time when the nation’s significant infrastructure needs will need to be addressed,” said NFMA chair Mary Francoeur.

The district court's decision against bond insurer Assured Guaranty Corp. centered on the court’s interpretation of sections 922 and 928 of the U.S. Bankruptcy Code, which have been incorporated into Title III of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). The district court held that the law did not require the continued application of pledged revenues to the payment of the bonds, nor permit the enforcement of a lien on the pledged revenues without first obtaining relief from an automatic stay. NFMA said that decision could reverberate far beyond the island.

“While this case is concerned with the Puerto Rico proceeding under PROMESA, the incorporation of the Revenue Bond Provisions into both the Bankruptcy Code and PROMESA broadens its application to bankruptcy proceedings affecting the entire municipal bond market,” NFMA said in a release.

NFMA chair Mary Francoeur

In its brief, written by Ballard Spahr attorneys, the NFMA told the court that this precedent could cost highly-rated issuers between five and ten basis points on their revenue bonds, while lower-rated issuers could pay between 30 and 50 basis points more.

“While these numbers may seem small in isolation, when applied to the anticipated sizable need for future infrastructure revenue bond financing, the economic impact on municipal issuers will be substantial,” the NFMA told the court. “Assuming an average annual issuance of $75 billion in infrastructure revenue bonds for 10 years ($750 billion in aggregate), the incremental interest cost to issuers over the next 10-year period would likely fall into the range of $2.1 billion to $6.2 billion as a result of the Assured Guaranty holding.”

Bill Oliver, the NFMA’s industry and media liaison, said most investors had thought the issue of how revenue bonds are treated in bankruptcy was settled in the late 1980s and that this decision had the potential to really impact the way investors view revenue debt.

“I think it definitely could throw the market for a loop,” he said.

The court is not obligated to consider arguments submitted by parties who are not litigants. It is unclear when the court might rule, but court documents show that additional briefs are due no later than July 9.

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